The Bubble I'm In On (TSLA)
Seeking Alpha Analyst Since 2020
- History of bubbles and similarities between AMZN and TSLA.
- Long term outlook for Tesla Stocks and what separates it from competition.
- EV market expansion opportunity.
- Tesla's increased profit margins.
- Short term outlook for Tesla and the coming short squeeze.
It is not up for debate, Tesla is a bubble. Tesla provides great opportunity long term for a variety of reasons. These include the Elon Musk factor, the growing EV (electric vehicle) market, Tesla's increased profit margins, and their great design team. Short term I am very uncertain, but we will likely continue to see their stock price soar as long as FOMO continues which will trigger a short squeeze of the stock. After that, who knows what’s coming.
History:I’d like to compare Tesla to Amazon in 1999. Amazon soared 900% as part of an industry wide tech bubble. The next year in 2000, the stock fell 80%. Well, when we look at Amazon today, that drop looks like a minor scratch on its way to a trillion dollar market cap. It gives us a good perspective of what it is like to invest in great ideas… and that is what Amazon and Tesla are. The market realizes the potential, then experiences FOMO (fear of missing out) as investors pile their cash into the company, and then it comes back down to reality. This is known as a bubble. Despite the likelihood of this happening to Tesla, I am all in. I am all in because of the chance of the stock not falling to a "reasonable price." It is innovative technology that I do not want to miss out on. If it falls, I'll add to my position. If it never falls, that would be even better.
Long Term: Let’s first discuss how Tesla shapes up long term. Their CEO, Elon Musk is THE best in the business. His coworker Kevin Watson says it best “I don’t want to be the person who ever has to compete with Elon. You might as well leave the business and find something else fun to do. He will outmaneuver you, outthink you, and out-execute you.” This comment about Musk is pretty common form people in his inner circle. He has created a team of employees that are more devoted and hardworking than any other company in America. A good CEO is a great thing to see when looking at long-term investments and he has the company headed in the right direction.
One of the most common criticisms you hear about Musk is also his biggest asset. His optimistic expectations both help him and hurt him. If he tells you SpaceX is getting to Mars in 5 years, he makes you believe it. But, will he finish it in 5 years? No, he probably won’t. His expectations are built on an error free and 24/7/365 work week. It is unrealistic but it is part of what separates his companies from their competition. This has hurt him multiple times in his career at Tesla while he boasted release dates for vehicles that were figuratively impossible. Despite these concerns, his optimism has helped him turn multiple startups into billion-dollar businesses. Tesla will continue to do very well with him leading the way.
Market Expansion: The EV market is built to change the world. Sure, I’m late to the party on this one, but the growth opportunity for EV's is astronomical. With the world moving towards renewable/sustainable sources of energy, this industry could be heading towards the moon. I hear a lot of concerns over Tesla losing marketshare in the EV industry and I can’t help but think… yes so what? Tesla's Model 3 captured 40% of marketshare in its release year. Is that sustainable? Of course not, but while Tesla will inevitably lose marketshare, the market will be much bigger to share. Think of it this way, the company won’t capture a 40% piece of the pie, but their 20% will be a piece of a much bigger pie in 5-10 years.
China is an opportunity like no other for electric vehicles. Electric vehicles don’t reduce CO2 emissions(shhh), but China continues to promote them as if they do. China’s EV market has been growing 60% annually with an 85% growth rate in 2019. This is in large part thanks to government subsidies that help those purchasing and selling electric vehicles. They are one of very few companies that are allowed to manufacture cars in China without government intervention which gives them an edge over other American manufacturers. If they can continue to build their footprint in China, it will give them a nice moat against other EV companies.
Increased Profit Margins: Tesla has an uncanny ability to do something that other companies wish they could do better, cut costs. There are countless stories about Musk asking his engineers to do the impossible and cut costs by thousands of dollars. This method, although grueling work, works. In the past few years there have been multiple instances of Tesla losing revenue in a quarter, but increasing profit margin in that same quarter. Usually when the company makes more money they can create better margins, but Tesla is built different. There is a funny story about Musk at SpaceX. He made his engineer build the entire computing system for the Falcon rocket for $10,000. Previously, NASA had not made a rocket’s computing system for less than 10 million dollars. This goes to show that he will do whatever it takes to cut costs and provide affordability for his customers.
There are lots of new EV companies coming out including the popular stock, Nikola Motors (NKLA). Nikola boasts about creating an electric/hydro semi-truck that will do things never before seen in the EV world. The problem I have with Nikola is that they have third party manufacturing. This takes away their ability to make changes on the fly involving their designs and software. Tesla on the other hand, creates their own designs and software from scratch and builds the entire vehicle from the ground up. This business model is more suitable for lowering costs and faster production.
Short Term: Now, let’s talk about the short-term outlook for Tesla. I believe as long as this FOMO stage or “fear of missing out” continues, we will see this bubble keep growing. This could end up hurting investors in the short term, but we will see. The reason that we are seeing 5-10% jumps in the stock price is because of a short squeeze brought on by the FOMO investors. This is sending the stock price up which is forcing the shortsellers to "cover their shorts/cut their losses" which sends the price up even higher aka a short squeeze. Tesla is the most shorted stock in history with over 20 billion dollars worth of shorts. This sets up well for a short squeeze on the stock. As the price is inflated higher and higher above its fair value, the fluctuations in the stock are going to become very uncertain. This does not worry me too much as I am looking at the long term strategy for Tesla.
Short term there are also opportunities for increased revenue with the release of the cyber truck. Currently Tesla is sitting on 650k pre-orders which would generate a ton of revenue.
A subscription revenue model could be in the short term future for Tesla depending on when they succeed with self driving cars. Currently they are running behind Google and AMZN in self driving tech. If they can outpace and get their footprint on the world for self driving tech first, then they can introduce Musk's idea for a subscription model. He wants to do a fixed monthly price for customers to have access to their self driving software in the cars.
Conclusion: You are an owner of a company, not a holder of a stock. This is one of the best pieces of advice I have been given in my brief investing career. When you go to buy a company, your main concern needs to be the fundamentals of that company. Sure, doing some technical analysis and looking at charts in important, but you are going to own that company, not that stock. If I believe in the future of this company for 5 years down the road, I am in. Short term I may miss out from not timing it correctly, but a company like Tesla is not one I want to gamble with. I want in and I don’t want to bet on their stock price falling in order for me to make a few extra dollars. Tesla is a once in a lifetime company, and although I am late to this realization, I am not too late and neither are you.
Disclosure: I hold TSLA
Analyst's Disclosure: I am/we are long TSLA.
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